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business
principles financial accounting

Questions and Answers of Principles Financial Accounting

El-2 (a) The following are users of financial statements._Customers _Securities and Exchange Commission _Internal Revenue Service _Store manager Labor unions _Suppliers Marketing manager
_Can we afford to give our employees a pay raise?
_Did the company earn a satisfactory income?
_Do we need to borrow in the near future?
How does the company’s profitability compare to other companies?
_What does it cost us to manufacture each unit produced?
_Which product should we emphasize?
_Will the company be able to pay its short-term debts?
El-4 The following situations involve accounting principles and assumptions.1. Grossman Company owns buildings that are worth substantially more than they originally cost. In an effort to provide
2. Jones Company includes in its accounting records only transaction data that can be expressed in terms of money.
3. Caleb Borke, president of Caleb’s Cantina, records his personal living costs as expenses of the Cantina.
Consider again the model truck example discussed in Section 75, except that the maximum speed of the wind tunnel is only 50 m/s. Aerodynamic force data are taken for wind tunnel speeds between V = 20
According to IFRS 8, which of the following needs not be reported for a business segment?(a) Segment revenue from external customers.(b) Total carrying amount of segment assets.(c) Total depreciation
According to IFRS 8, which factor(s) should be considered in identifying segments?(a) Similarity of economic conditions.(b) Relationships between operations in different geographical areas.(c)
IFRS 8 distinguishes business segments and geographical segments.(a) True.(b) False.AppendixLO1
In what way(s) might reporting financial information by segment help the financial statements users?(a) It may help them better understand the entity’s operating model and thus better interpret
The Economic Value Added represents the creation or increase in ‘value’, resulting from the entity’s current business activities, over and above the value of goods and services, consumed by the
How is the interest coverage ratio calculated?(a) Operating income (before interest expense and income taxes)/Interest expense.(b) Net income/Interest expense(c) Shareholders’ equity/Interest
How is the price/earnings ratio (PER) calculated?(a) Market price per share/Book value per share.(b) Market price per share/Earnings per share.(c) Cash dividends per share/Market price per share.(d)
How is the cash ratio calculated?(a) (Cash þ Marketable securities þ Accounts receivable)/Current liabilities.(b) Cash dividends per share/Earnings per share.(c) Cash/Marketable securities.(d)
In which type of comparisons are the ratios of one year compared to the historical ratios of the company?(a) Comparisons against a competitive benchmark.(b) Comparisons against rules of thumb based
Which of the following statements is not correct?(a) A ratio reflects a business model relationship between two or more variables.(b) When using comparative ratio analysis, it is important to
Which manipulation cannot be detected by comparing net income and operating cash flow?(a) R&D capitalization(b) Increasing profit by selling a piece of land(c) Reducing profit by exaggerating
Which statement below is not true?(a) The income from assets disposals is normally non-recurring(b) It is difficult to manipulate net income since it is accrual based(c) A sharp increase of
Cash-based earnings management is easier to detect than accrual based earnings management(a) True(b) False.AppendixLO1
Which factor(s) influence(s) the quality of earnings?(a) Accounting methods(b) Accounting estimates(c) Classification of exceptional items in the income statement(d) All of these.AppendixLO1
Which type of accounts manipulation mainly consists in a reduction of the variance of the earnings stream?(a) Creative accounting(b) Earnings management(c) Income smoothing(d) Big bath
What ratio is used to calculate the ‘cash flow yield’?(a) Operating cash flow/Net sales(b) Operating cash flow/Interest paid(c) Operating cash flow/Net income(d) Operating cash flow/Average
Which of the following ratios is the cash liquidity ratio?(a) Operating cash flow/Average current assets(b) Financing cash flow/Average current liabilities(c) Financing cash flow/Average current
How is free cash flow calculated?(a) Cash flow from operating activities þ Cash flow from investing activities(b) Available cash flow þ Cash flow from financing activities(c) Available cash flow
How is the available cash flow calculated?(a) Cash flow from operating activities (assumed to be positive) þ Cash flow from investing activities(assumed to be negative)(b) Cash flow from investing
Generally, the operating cash flow is expected to be negative(a) True(b) False AppendixLO1
How to use the indirect method of calculation of the operating cash flow as a tool to analyze the earnings quality of a company.AppendixLO1
The difference between cash-based or accrual-based earnings management.AppendixLO1
How to analyze the statement of cash flows.AppendixLO1
If the lease of an asset is considered to be a financial lease (i.e., is capitalized under IFRS rules), the rent paid (periodic lease payment) is considered as part of the ‘resources consumed from
If the income statement of a firm is structured by function, the calculation of value added can be carried out without any restatement(a) True(b) False.AppendixLO1
The lists offered below contain elements called ‘intermediate balances’ and some elements of income statements that are not called intermediate balances. Which list contains only so-called
One element of the strategy of a firm is to decide how to share its value added between(a) Customers, investors, investments (preparing the future) and taxes(b) Employees, taxes (Government),
The term EBIT means(a) Earning Before Investments and Transport expenses(b) Earnings Before Investments and Taxes(c) Earnings Borne In Transit(d) Earnings Before Interest and Taxes.AppendixLO1
In a common-size analysis of the income statement, the evolution over three years of which of the following elements is the most relevant for a forecast of the future income of a firm(a) Net income
Founded in 1853 by a succession of acquisitions and divestitures, Compagnie Ge´ ne´ rale des Eaux became a huge diversified conglomerate. It renamed itself Vivendi in July 2000, Vivendi Universal
When an entity extends its geographical market to reach less dense customer bases and thus increases its sales volume, it is logical (assuming the mix of sales remains the same) that, in the short
Common-sizing an income statement generally means expressing each line item of the statement as a percentage of(a) Gross sales(b) Operating profit(c) Net sales(d) Net income before taxes AppendixLO1
Which of the situations described below would mean the firm analyzed is caught in a ‘scissor effect’(a) Its interest expense grows faster than its labor compensation expense(b) Its cost of goods
If the balance sheet is presented by term in a decreasing format, the cash equation and the three related concepts (working capital, working capital need and net cash) cannot be computed(a) True(b)
The cash equation and the three related concepts(working capital, working capital need and net cash)can be computed only if the balance sheet is presented by term (and not by nature)(a) True(b) False
A positive working capital need is typical of a firm operating in the distribution sector(a) True(b) False AppendixLO1
Which approach gives an indication of the financial short-term solidity of an entity and its state of health?(a) The approach that considers the equation:Working capital ¼ Shareholders’ equity
How is the net cash calculated?(a) Bank borrowings þ Bank overdrafts(b) Bank borrowings þ Bank overdrafts – Positive cash and cash equivalents(c) Positive cash and cash equivalents – Bank
How is the working capital need calculated?(a) Working capital – Current assets (except cash)(b) Current assets (except cash) – Current liabilities(c) Long-term debt – Current liabilities(d)
How is the working capital calculated?(a) Shareholders’ equity and long-term debts –Fixed assets(b) Shareholders’ equity and long-term debts þFixed assets(c) Fixed assets þ Current assets(d)
Which of the following relations is correct?(a) Working capital – Working capital need ¼ Net cash(b) Working capital/Working capital need ¼ Net cash(c) Working capital Working capital need ¼
Common-size analysis is based on the preparation of common-size financial statements, i.e., a balance sheet presented in percentage of a base figure (indexed as 100). What is generally the base used
How to analyze the informational content of the statement of financial position/balance sheet.AppendixLO1
Which of these stages are included in the indirect method? (more than one answer is possible)(a) Add any increase in inventory(b) Subtract any increase in accounts receivable(c) Add any loss on sale
Dividends received are usually included in(a) Operating activities(b) Investing activities(c) Financing activities AppendixLO1
Under IAS 7, bank overdrafts are reported either as a part of cash equivalents (as negative cash) or as a part of financing activities(a) True(b) False AppendixLO1
Depending on the country, interest expenses are included in either operating activities or investing activities(a) True(b) False AppendixLO1
When using the direct method to compute the operating cash flow, which of the following items will not be included?(a) Cash received from customers(b) Depreciation expense(c) Cash paid to
When using the indirect method to compute the operating cash flow, which of the following items will not be included?(a) Change in inventory(b) Depreciation expense(c) Gain on sale of fixed assets(d)
Which of the following would not be included in financing activities? (more than one answer is possible)(a) Proceeds from issuance of shares(b) Dividends received(c) Repayment of debt(d) Issuance of
Which of the following would not be included in investing activities? (more than one answer is possible)(a) Repayment of a loan granted to a subsidiary(b) Dividends paid(c) Purchase cost of fixed
Which of the following would not be integrated in the computation of the cash flow from operating activities?(a) Cash received from customers(b) Cash paid to suppliers(c) Proceeds from sale of fixed
How to deal with non-cash investing and financing flows.Which of the following cannot be a main objective of a statement of cash flows?(a) To provide relevant information on the cash receipts and
What the ‘potential cash flow’ is and what is its role in the determination of the operating cash flow.AppendixLO1
What the ‘direct’ and ‘indirect’ methods of computation of the operating cash flow are.AppendixLO1
What a statement of cash flows is.AppendixLO1
The equity method should be used when the percentage of control is more than 30 percent and less that 50 percent(a) True(b) False AppendixLO1
In the case of a joint venture, the appropriate consolidation technique is the proportionate consolidation(a) True(b) False AppendixLO1
Goodwill is the difference between the purchase price (cost of investment) of shares and the book value of these shares(a) True (b) False.AppendixLO1
Non-controlling interests are reported when which method is used?(a) Full consolidation(b) Equity method(c) Proportionate consolidation(d) None of these AppendixLO1
The only possibility to hold control of a company is to own more than 50 percent of the voting rights of this entity(a) True(b) False AppendixLO1
Associate and affiliate are often considered as synonymous(a) True(b) False AppendixLO1
Non-controlling interests can be reported (several possible answers)(a) As a part of shareholders’ equity(b) As a part of long-term liabilities(c) As a part of current liabilities(d) Between
In the diagram of question 2 above, the percentage of interest (ownership, stake) is(a) 10%(b) 20%(c) 30%(d) 27%(e) None of these AppendixLO1
The percentage of interest(a) Is used to define the dependency link(b) Is used to decide about the inclusion of a company in the consolidation scope(c) Reflects the interests that are controlled
How mergers are recorded.Select the right answer (one possible answer, unless otherwise mentioned).AppendixLO1
How the translation of financial statements labelled in a foreign currency is recorded.AppendixLO1
That deferred taxes may arise as a result of specific consolidation rules and procedures that may differ from tax rules.AppendixLO1
How the consolidation process works.AppendixLO1
What goodwill represents and why and how accounting for it has evolved over time.AppendixLO1
What are non-controlling interests (formerly minority interests) and why we need to report them and how.AppendixLO1
That three methods of consolidation coexist and that the choice of the appropriate one depends on the extent of the relation between the investing firm and its investee.AppendixLO1
Why consolidated financial statements are useful when stand-alone statements may not be so.AppendixLO1
What a business combination is.AppendixLO1
A provision for restructuring can be recorded as soon as a company has decided to close a business entity(a) True(b) False.AppendixLO1
A contingent liability is recorded(a) As part of the assets(b) As part of the shareholders’ equity and liabilities(c) As part of the revenues(d) As part of the expenses(e) None of these AppendixLO1
The net salary (after deduction of withholdings) is recorded as such as an expense(a) True(b) False AppendixLO1
Notes payable represent bills of exchange or promissory notes(a) True(b) False AppendixLO1
When the balance sheet is presented by nature, the current portion of a long-term liability is still included in the financial liabilities section of the balance sheet(a) True(b) False AppendixLO1
Warranty costs are recognized as an expense(a) At the time the products covered by the warranty are sold(b) At the time the costs are really incurred(c) None of these AppendixLO1
An example of an item that is not a current liability is(a) Accrued expenses(b) Prepaid expenses(c) Salaries payable(d) Accounts payable(e) Unearned revenues(f) None of these AppendixLO1
An example of a current liability is(a) Bank loan or borrowing (long-term portion)(b) Unearned revenues(c) Share capital(d) Retained earnings(e) None of these AppendixLO1
An example of financial liabilities is(a) Income tax payable(b) Unearned revenues(c) Bank borrowings(d) Salaries payable(e) None of these AppendixLO1
Provisions for risks and liabilities are recorded(a) In the expenses(b) In the revenues(c) In the shareholders’ equity and liabilities(d) As a contra-asset(e) None of these AppendixLO1
How to analyze liabilities.AppendixLO1
How to record employee benefits.AppendixLO1
How to record and report leased assets.AppendixLO1
That the distinction between finance and operating leases is important.AppendixLO1

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